Legal Issues

Iowa Legislature Changes Mechanic's Lien Law - April 7, 2017

What Happened?

On March 30, 2017, the Iowa Senate passed House File 586. This legislation included a provision expanding the category of residential general contractors who are required to timely file a "Commencement of Work" Notice (or C.O.W. Notice) at the outset of a project to preserve their right to later file a mechanic's lien. Specifically, for those who are required to file them, C.O.W. Notices must be filed on the online MNLR registry no later than 10 days of commencement of work on a residential project for one to preserve their mechanic's lien rights on such project.

This legislation was introduced by the Iowa Finance Authority and had support from the banking industry, closing companies, and Iowa Title Guaranty, while most within the residential construction industry opposed the legislation.

The bill was passed by both the House and Senate, and is now on to the Governor to be reviewed and likely signed into law in the near future. The effective date of the new law will be July 1, 2017.

What was the Prior/Current Law on this Issue?

Prior law (including both statutory and case law) only required general contractors with subcontractors to file a C.O.W. Notice on the MNLR no later than 10 days from the start of every residential construction project in order to preserve their lien rights. This interpretation of the law was affirmed by the Iowa Court of Appeals in 2016 in the mechanic's lien case of Standard Water v. Jones in which Jodie McDougal represented a residential contractor.

It should be noted that Iowa statute defines general contractors as contractors who have direct contracts with homeowners. Also, per Iowa statute, the general contractor's C.O.W. Notice, as well as the related notice sent by the MNLR administrator to homeowners, generally inform homeowners that subcontractors not directly hired by them have the right to file liens against their property if not properly paid for their work by the general contractor and otherwise advises homeowners of the lien law.

Thus, under the prior law, it was only residential general contractors with subcontractors who were required to file a C.O.W. Notice, which therefore excluded (1) contractors and remodelers who self perform all work without any "subcontractors" (as defined under Iowa statute), and (2) suppliers who supply directly to homeowners. These two categories of companies did not previously have any pre-lien requirements. Unfortunately for those residential contractors and suppliers, this bill extinguishes those exclusions.

What Does the New Law Mean for My Construction Company?

By extinguishing those exclusions, as of July 1, 2017, the law will require all general contractors (that is, all contractors who directly work for a homeowner) to timely file a C.O.W. Notice at the start of every residential construction project to preserve their lien rights, regardless of whether or not a general contractor uses subcontractors on the project. Thus, even contractors who self perform all work without any "subcontractors," as well as suppliers who supply directly to homeowners, will now have to timely file this C.O.W. Notice.

Will There Be Any Other Practice Changes?

As noted, the bill was introduced by the Iowa Finance Authority and had support from the lending and closing industries, as the bill will positively affect those industries and streamline their loan closing practices.

After the bill becomes effective (and after 90 days following the effective date), lenders and closing agents will likely no longer ask for all lien waivers. Instead, they will check the MNLR registry and only be concerned with general contractors and subcontractors who have properly preserved their lien rights through their timely filing of their pre-lien notices.

Is There Anything Else I Should Know About Pre-Lien Notices?

The bill does not affect the requirements that all subcontractors must file a Preliminary Notice at the outset of every residential construction project in order to preserve their right to later file a mechanic's lien if not paid.

The bill also does not change the definitions under the law. Among other things, contractors who work for an "owner-builder," as opposed to a true owner, are considered to be subcontractors for pre-lien notice purposes. The typical "owner-builder" is a spec homebuilder who builds a spec house on a builder-owned lot.

What is the Bottom Line for Residential Iowa Contractors?

All general contractors, subcontractors, and suppliers who want to preserve their mechanic's lien rights on residential projects must timely file their C.O.W. Notice (for general contractors) and Preliminary Notice (for subcontractors) on all residential projects. Otherwise, all lien rights are lost.